ARR and Recurring Revenue
Definition
Software companies are increasingly selling subscriptions rather than licences. The recurring revenue this generates is far more reliable than one-off transactions — which is why the capital markets place a higher value on it.
Why ARR and reported revenue diverge
Reported revenue often includes one-off income from setup fees, consulting, or training. ARR captures only the recurring portion. A company with high revenue but a low share of ARR looks more like a services firm than a software provider — and tends to have the lower margins to match.
Net revenue retention
This metric measures how much revenue existing customers from the previous year generate in the following year — including expansions and cancellations. A figure above 100 per cent means the company is growing through its existing customer base alone. Values well below that point to a churn problem.
Watch out for how ARR is defined
ARR is not an audited accounting figure; it is a metric each company defines for itself. Some include contracts that have not yet started, or pilot projects with no intention to renew. It is worth reading the footnotes carefully.
Common mistakes
- Confusing ARR with profit — high ARR can go hand in hand with heavy losses.
- Evaluating ARR growth without looking at the cost of acquiring new customers.
- Directly comparing ARR figures from different companies when each defines the metric differently.
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Educational content only, not investment advice. Small caps are highly speculative and total loss is possible. All information without warranty.